L&G: Sustainable investing – time for private markets to step up

May 22, 2026

Despite market headwinds, asset owners are reaffirming that long-term economic growth depends on systemic risk management and sustainability-driven value creation. Private markets must now step up.

By Amelia Tan, Head of Responsible Investment and Stewardship, L&G

  
Demand for sustainable investment is growing. In multiple markets, large asset owners, including public pension funds, sovereign wealth funds, and insurers, continue to view sustainability as inseparable from their long-term fiduciary duty. At the same time, many asset owners are reallocating capital to managers who can show that their sustainability capabilities translate into better long-term portfolio resilience and value creation. Investors in a position to meet this demand may achieve both resilient, risk-adjusted returns and long-term asset value.

Across global financial markets, headlines suggest a retreat from sustainable investing, but the underlying reality is more durable. Globally, JPMorgan estimates that $ 7.3-11.7 trillion of externally managed assets sit under explicit sustainable investment policies. Recent Morningstar data shows that 61% of asset owners believe sustainability considerations reinforce, rather than compete with, their fiduciary responsibilities – that’s an 8% increase in just one year. This shift is driven by a pragmatic recognition: investors with diversified, economy-wide exposures cannot ignore systemic risks such as climate change, the degradation of natural capital, infrastructure fragility, and energy market volatility. These are not abstract ESG topics, they are structural drivers of long-term asset values and economic growth.
 

Managing sustainability risk is now an operational requirement rather than a discretionary environmental choice.

 
In parallel, investors increasingly recognise the potential commercial opportunities in this area. We have seen an increase in demand from institutional investors for strategies that are not only commercially competitive but also have the potential to deliver real-world outcomes. Trends in investor sentiment sit alongside a concurrent rise of private markets as a major investment theme.

The importance of private markets

Private markets investments directly shape the real economy. They are often place-based and drive economic growth: infrastructure, energy systems, transport networks, digital connectivity, housing, and industrial capacity. These are precisely the sectors most exposed to climate, energy and social disruption, and, in our view, the most critical to long-term growth. Several forces are reshaping the private markets landscape. Together, they underscore why responsible investment has become a core component of value creation and risk management.

First, systemic risks – particularly physical climate risks – are becoming impossible to ignore. Rising temperatures, more frequent storms, and water scarcity are among the factors already altering the economics of real assets.¹ This translates into higher operating costs for asset owners, from cooling loads in data centres to investment in flood defences and grid-stability measures. Extreme weather events are also creating greater revenue volatility as disruptions to operations become more frequent and more severe. Simultaneously, assets in high-risk regions are becoming more costly to insure and in some cases increasingly difficult to secure coverage for at all. Taken together, the evidence is clear: real assets are disproportionately exposed to physical climate risks, with direct consequences for long-term portfolio resilience.

We are also seeing a reallocation of capital towards productive and transition-aligned assets. Governments and regulators across major markets are increasingly directing investment towards sectors underpinning economic competitiveness and societal resilience: clean power, digital infrastructure, social infrastructure, and domestic supply chains. These areas have historically been subject to underinvestment, yet they remain central to meeting climate and energy-security goals. Private markets investors play a pivotal role here: they can mobilise long-duration, flexible capital into expanding or modernising sectors that can support both economic growth and decarbonisation. For many institutional investors, the question is no longer whether the economy is transitioning, but how quickly, and with what implications for asset allocations.

A third force comes from clients and partners themselves, who are becoming more explicit in their expectations. We’ve noticed institutional investors are asking for deeper visibility of long-term risks, stronger asset-level stewardship, and clearer evidence that sustainability integration enhances financial outcomes. They increasingly recognise that forward-looking risk management – whether relating to climate resilience, regulation, or technological change – is essential to preserving value, and driving an evolution in what constitutes ‘best-in-class’ private markets management. This suggests that sustainability is no longer treated as an optional overlay or a marketing attribute. It is becoming a central means of identifying opportunity, protecting long-term cashflows, and ensuring assets remain competitive, resilient, and aligned with the direction of the real economy.

Financing the clean power and infrastructure transition

As these trends accelerate, we’ve noted that expectations of private markets managers are changing. Managing risks and identifying opportunities are no longer sufficient on their own. Asset owners are increasingly directing capital towards managers who can deliver real-world solutions and contribute meaningfully to long-term economic resilience. There is a clear appetite for investors who can support the transition of the underlying economy, building, upgrading, and operating assets that will underpin future competitiveness.

This context has led to a corresponding shift in climate-related investing. Attention has shifted to the practical task of enabling the transition: expanding clean power generation, strengthening electrifica- tion infrastructure, and developing the power-rich digital capacity that supports modern growth. These systems may face acute constraints, but they also represent some of the most compelling opportunities.

Our own research² highlights the rapidly tightening link between energy systems and digital infrastructure. Electrification, decarbonisation, and digitalisation are driving sustained growth in power demand, with data centres among the most energyintensive assets in the modern economy. This is increasing reliance on reliable, low-carbon power. At the same time, grid congestion, slow permitting, and limited interconnection capacity – particularly in the US and Europe – are constraining development. As a result, assets with secure access to power are becoming decisive, making power-rich real estate a critical driver of project viability and long-term value. The combined message is clear. Managing sustainability risk is now an operational requirement rather than a discretionary environmental choice. We believe investors who understand the interaction between energy systems, physical infrastructure, and digital growth will be best placed to deploy capital that can generate strong financial performance and contribute to a more resilient and sustainable real asset ecosystem.
 

1. ^{OECD, Future-Proofing Real Estate Investments (2025)}
2. ^{L&G Asset Management, The convergence of digital and clean power infrastructure}

Read the full report in Financial Investigator magazine